Legal Updates

Don’t wind me up!

A winding up petition can be a very effective tool to persuade a reluctant debtor to pay an outstanding invoice. Not only is there the prospect of the company being placed into liquidation, a petition can be advertised seven business days after it is served. Advertisement typically results in the company’s bank account being frozen, which will inevitably have a paralysing effect on its business. Once this stage has been reached the company may have passed the point of no return.

As the implications are potentially so significant, safeguards exist to present the inappropriate presentation of petitions.

A petition should not be presented for a disputed debt. If a debt is disputed on substantial grounds the court may grant an injunction to restrain the presentation of a petition (if it has been threatened in advance) or to stop the advertisement of a petition once issued. Either result is likely to include a substantial costs order against the petitioning creditor.

The court will typically dismiss a petition that is based on a contract that contains an arbitration clause.

The recent case of Eco Measure Market Exchange Limited –v- Quantum Climate Services Limited involved both these issues. A petition had been presented in relation to sums claimed under a service agreement. Not only was the debt was said to be disputed, the service agreement provided that any disputes must be referred to arbitration.

Undaunted, the creditor relied on the fact that the arbitration clause required that even a disputed sum must be paid up front and reclaimed in a subsequent arbitration. Surely therefore the existence of the arbitration clause did not affect its right to immediate payment - the sums would have to be paid in any event before arbitration could commence?

The court did not agree. It was clear on the facts that there was an underlying dispute. In the circumstances, it was appropriate that any arguments about whether and when payments should be made should be determined by the arbitrator rather than the court in winding up proceedings. Accordingly, the petition was dismissed.

The case is a reminder that the court will strictly apply the requirement that a debt in winding up proceedings must not be disputed and will be slow to accept any attempt to erode this principle.

For further information about this or any other Restructuring & Insolvency matter please contact Clarkslegal's restructuring & insolvency team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.